Fading Russian oil discounts adding to India's widening trade deficit woes

After the outbreak of the Russia-Ukraine war, India had stepped up oil imports from Moscow since they were offering heavy discounts.

India's goods trade deficit reached a seven-month high of $23.78 billion in May, largely attributed to a substantial increase in the oil import bill.

ICRA's Aditi Nayar pointed out that in sequential terms, 71 percent of the widening merchandise trade deficit was driven by the net oil balance, which saw a significant volume surge.

India's oil imports rose 28 percent to $19.95 billion against $15.57 billion in the same month last year.

And, one of the reasons for this spike in the oil import bill is expensive Russian oil purchases.

Also Read | India's merchandise trade deficit widens to $23.78 billion in May

IDFC First Bank economist Gaura Sen Gupta explains that inbound shipments of discounted crude from Russia had kept the oil import bill contained in FY24.

"India imported 36 percent of total crude oil from Russia (in volume terms), at an imputed cost of $76 per barrel; Iraq and Saudi Arabia which are the second and third largest source of crude oil imports, accounting for 36 percent of the share, had an imputed cost of $79 per barrel and $90 per barrel respectively," Sen Gupta said.

She added that in FY25, based on April data, the imputed cost of crude oil from Russia has risen to $83 per barrel, a $7-rise versus the FY24-levels. Hence, the support from discounted crude oil from Moscow might be lower in the ongoing financial year.

To be sure, lower domestic oil inventories leading to more purchases internationally could have also driven up India's import bill.

In addition to the impact of the sanctions by the Group of Seven (G7) nations on ships and vessel operators carrying Russian oil priced above the $60 a barrel cap, the Red Sea crisis may have also led to an erosion in discounts on crude oil from Moscow.

The Red Sea has been in the news since October 2023 for periodic attacks on commercial vessels by Houthi rebels of Yemen, raising freight costs as shipments opt for longer routes or experience delays.

Prashant Vasisht, VP & Co-Head, Corporate Ratings, ICRA says that Russia's crude oil discounts have come down to only $2-$3 per barrel. This stands in sharp contrast to a discount of $8-$10 per barrel last year, as per certain estimates.

"In April and May, there could have been an increase in crude procurement as well, as the demand for auto fuels had also increased. Because of travelling due to elections, auto fuel consumption was also up in these months," Vasisht added.

BPCL management on May 10 said that it expects discounts on Russian crude oil to narrow to $3-$4 per barrel or $3-$6 per barrel.

Key international benchmark oil prices have been hovering around $80-85 per barrel of late. Though this is lower than the $90 per barrel level seen back in mid-April, it is higher than the range seen in early June.

After the outbreak of the Russia-Ukraine war, India stepped up oil imports from Moscow since they were offering heavy discounts.

Given the cheaper supply, Moscow has taken over the top spot in India's crude oil imports, followed by Iraq and Saudi Arabia.

Volatility in global oil prices has a larger impact on India since it is the world's third-largest importer and consumer of this commodity, and purchases over 80 percent of its needs from international markets.

A wider trade deficit has a direct impact on India's current account deficit, but economists believe that worries on that front are limited so far.

"The wider monthly merchandise trade deficit in May notwithstanding, the outlook for the current account deficit for FY2024-25 remains benign, in our view. Commodity prices for two of India's largest imports (gold and crude oil) have come off following a brief spike in March and April," Barclays Bank, Singapore said in a note on June 14.

Barclays see India's FY25 current account deficit at 1 percent of GDP, down from 1.1 percent earlier and expects it be eminently financeable, given the likely inflow of FPI investments from the upcoming inclusion of Indian government bonds in global bond indices (JP Morgan as of June 2024, and Bloomberg effective January 2025).